When renting out a home is the best option

Plus, one reader disagrees with advice on strategic default

LewSichelman

Realty Q&A is a weekly column in which Lew Sichelman, a nationally syndicated columnist who has been covering the housing market for more than 35 years, responds to readers’ questions on real estate.

WASHINGTON (MarketWatch) — Question: My nephew recently got married and moved into his bride’s house. He has been trying to sell his house in the $100,000 range for eight months. He purchased the house for $80,000 five years ago. His down payment was $5,000 and he has a 30-year mortgage.

The happy couple are just starting out as school teachers, so they do not have much disposable income. He confided that their two mortgages were weighing them down. They are not interested in renting, as this home is several hundred miles from where they now live.

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What advice would you give this couple? Should they refinance at the same time they are trying to sell? Should they lower the price drastically to just get rid of the house and the associated mortgage? —P.B.

Answer: This is tricky, ‘cause it all depends on a number of things.

First, I am rather surprised that something priced that inexpensively is not selling. Agents and brokers tell me that starter houses are going fast, as first-time buyers act to gobble up today’s super-low mortgage rates. So, is there something wrong with the house? Perhaps if your nephew and his new wife spent a few bucks sprucing up the place, it would sell. Just a thought.

Trying to refinance probably won’t do much, if anything, for your cash-strapped relative. Even if he is successful in lowering the payments, he’d be sitting on an empty property. For what reason? Does the happy couple intend to return to it sometime in the reasonably near future?

You didn’t tell me where the place is located. But even if you did, I still may not be familiar enough with the area to offer anything profound based on local market conditions.

Here’s what I think I would do. Find an excellent rental agent with tons of experience, give him some pretty strict instructions about the kind of tenants you want and how to act — and how soon — on your behalf should something go wrong, and turn the place into an income-producing property. I have found that houses are fairly indestructible. Other than cosmetic things, most tenants won’t do much damage, unless they are malicious. But you can protect against that by being careful who you rent to in the first place.

Hopefully, the house will throw off enough income, even after the agent’s 15% to 17% commission, to cover the mortgage payment. But even if it doesn’t, the difference will be much less than if your nephew continues to pay the mortgage entirely out of his own pocket. And on top of that, the tax bennies for rental properties are pretty good, too. Just make sure your relative understands that he has to maintain a close vigilance on the place — and his agent — and to act expeditiously if the rent isn’t received within five days from the first of every month.

Frank Perdue, the chicken guru, used to say it takes a tough man to make a tender chicken. It also takes a tough man to be a good landlord.

To walk, or not

Question: Since I lost my job three years ago, we have been paying our mortgage diligently and sacrificing in other areas of our lives — like our future, for example — to make sure we live up to our commitment. Now I learn that Mortgage Bankers Association has strategically foreclosed on its headquarters property.

In fact, a cursory investigation shows that many financial institutions have strategically defaulted on debts that they clearly could pay! So what should I do? We bought our condo for $375,000 in 2005. There have been several foreclosures in our complex and a similar model (our neighbor’s short sale) just sold for $110,000. Why should we not walk away and save ourselves $265,000? Surely my credit score isn’t worth that much. Is there ANY reason to stay? —L.Q.

Answer: First, let’s set the record straight. I have seen many media reports — including Jon Stewart’s hilarious take on Comedy Central — but they are incorrect. The MBA’s building was sold as a short sale with the lender’s permission, and the MBA agreed to make up over time — with interest — the difference between what the building was sold for and what it owes its creditors. So the MBA didn’t exactly walk away from its obligations. It simply did what many lenders are allowing underwater home owners to do.

As far as your individual situation is concerned, I can’t make up your mind for you. But you have to consider where you are going to go if you jump ship, and whether you will need credit anytime in the next seven years. Do you want to be a homeowner again, at least sometime in the near future? Also ask yourself if there is any chance at all that values in your area will come back, and if so, how long that might take.

The question is, will you live there — can you live there — for as long as that takes? Is it just the two of you? Do you plan to start a family or expand the one you already have? Will you need more space as the children grow, or is what you have now sufficient for the long haul? Do you want to stick it out that long? Is the neighborhood going downhill? You have to look into your own personal crystal ball and decide for yourself.

At the same time, $265,000 is a lot of money. And you will be paying a lot more than that over time because of the loan interest. So, if you have somewhere else to go — perhaps you can move back in with your parents, or find a decent place to rent — and can wait as long as it takes for your credit record to absorb the hit, it might make sense, at least financially, to get out now before you throw any more money down the rabbit hole.

Response

Of course, not everybody agrees that folks should walk away from their obligations. They believe it is immoral to do anything more than keep paying and paying and paying. Here’s a response from Larry Sfinas in Southampton, Pa., to my recent answer advising a reader to throw in the towel. I must say, I have never been cussed out so gracefully. And the message was signed “cordially.” See previous Realty Q&A.

“WRONG, immoral male bovine feces. You are an immature dishonorable fraud for giving credence to lying, stealing and dishonorable acts. The world’s failures stem from your condoning the failure to keep one’s word. You borrowed the money and agreed to repay it. Keep your word!”

By the way, Larry says he has a Master of Science degree in financial services, so he must be smarter than the rest of us. But I can’t help wondering what he’d do if he found himself so far underwater on his mortgage that he would never get out from under.

Nationally syndicated columnist Lew Sichelman has been covering the housing market for more than 35 years. Because of the volume of mail he receives, he cannot answer individual questions, nor can all questions be answered in this space. Email lsichelman@aol.com

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